Qualcomm violated antitrust law by brandishing its market dominance to squeeze excessive licensing fees out of phone manufacturers, a federal judge in California ruled, delivering a major jolt to the critical components market for next-generation smartphones.

U.S. District Judge Lucy Koh’s ruling late Tuesday night sided with the Federal Trade Commission, which in 2017 sued the San Diego-based chipmaker on accusations that its agreements with phone-makers undermined competition.

Qualcomm is one of the largest suppliers of 5G wireless chips, the components necessary to connect smartphones to cellular networks that promise ultrafast downloads and widespread access to new technologies, services and apps.

Proponents say 5G will offer speeds that are faster than those of most home internet connections. The reliability of such a network could spur the development of self-driving cars, smart appliances and remote medicine, which rely on web connections.

With the first wave of fifth-generation smartphones due later this year, wireless companies are jostling to bolster their 5G capabilities. By 2022, 5G cellular networks will power as much as 9% of mobile data connections across North America, according to a recent report from Cisco.

U.S. officials have framed development of the technology as a race against China to dominate the next frontier of the commercial internet. Whichever nation gains that advantage will largely shape – and benefit economically from – add-ons such as apps, services and other innovations, policy analysts say. When the United States took the lead on 4G mobile technology, for example, it gave rise to the app economy, which is still dominated by U.S. firms, according to the Cisco.

But the ruling could upend Qualcomm’s business model.

The judgment comes a month after Qualcomm settled its epic dispute with Apple, ending years of litigation. The deal resolved all 80 lawsuits between them worldwide and included licensing and supply agreements. The legal battle stemmed from the iPhone-maker’s allegation that Qualcomm abused its market position for wireless modem chips.

On Wall Street, the settlement had been seen as a sign the FTC’s case against Qualcomm was weak, said Daniel Ives, an analyst at Wedbush Securities, making Tuesday’s ruling all the more surprising. “This is a gut punch for Qualcomm and could have a major ripple impact across the smartphone industry,” he said.

Qualcomm’s legal defeat may also carry foreign policy implications. The Trump administration has moved to limit China’s access to U.S. markets, especially in industries deemed vital to national security, such as telecommunications. Just last week, the White House placed Chinese telecom giant Huawei on a trade “blacklist.” But the Qualcomm decision may weaken the Huawei ban, Ives said, by giving Beijing leverage in the battle over smartphone chips.

“Qualcomm is dealt a blow with this FTC ruling as the main U.S. 5G arms dealer,” he said, while Huawei’s position is strengthened.

Earlier this month, the U.S. Department of Justice weighed in on the FTC’s dispute with Qualcomm, warning that without first holding hearings on the matter, an overly broad remedy from Koh could stymie innovation in the market for next-generation wireless technology.

But Koh wrote that potential resolutions had already been discussed during trial. Qualcomm must now negotiate or renegotiate its terms with customers without threatening to pull its chips or to impose discriminatory provisions, the ruling said, and make its licenses available to chip suppliers at “fair and reasonable” rates. It also must forgo the exclusive supply agreements it brokered with Apple and others, which tend to lock out market rivals.

The court ordered Qualcomm to undergo seven years of FTC monitoring to ensure its compliance. And the company is barred from interfering with customers who might want to report potential misconduct to a government agency.

“Qualcomm’s licensing practices have strangled competition” Koh wrote. The company’s leading position in the market for 5G wireless chips, she noted, makes the company’s illegal conduct likely to continue.

Koh seemed to take particular issue with Qualcomm’s royalty rates, which are based on the sale price of a smartphone. Qualcomm’s own documentation acknowledged that its chips don’t drive the value of a handset, she noted, yet the company continued to take the same 5% cut from customers despite its modem chip’s declining relevance. Koh found that Qualcomm used its dominant market position to extract billions of dollars from phone companies this way.

Royalties are generally based on the value of specific patented parts, not of the entire final product. Koh ruled that Qualcomm’s use of a phone’s price as the royalty base is inconsistent with federal patent law.

Qualcomm said it will seek to put a hold on Koh’s ruling and move for an expedited appeal.

“We strongly disagree with the judge’s conclusions, her interpretation of the facts and her application of the law,” said Don Rosenberg, Qualcomm’s executive vice president and general counsel.

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